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view briefly the principles underlying the issuance of these certificates. It will be recalled that, in passing the adjusted compensation act, the Congress, after extensive consideration, determined in favor of adjusted compensation to veterans in the form of 20-year endowment policies rather than the immediate payment of cash. Under this act, the net basic amount due to each veteran, plus an additional credit of 25 per cent to compensate for deferring the payment for 20 years, was used to determine in each case the amount of 20-year endowment insurance that could be purchased on the date the certificate was issued, if the combined amount were applied as a single net premium in_accordance with accepted actuarial principles and on the basis of the American Experience Table of Mortality, with interest at 4 per cent per annum, compounded annually. Adjusted service certificates, which are, in effect, 20-year endowment policies with face or maturity values determined as above indicated, were distributed to the veterans.

On December 1, 1930, the face value of the certificates outstanding aggregated $3,409,304,122. To retire these certificates at face value in 1931 rather than at maturity, in so far as the veteran is concerned, will represent the distribution of about $1,640,000,000 more than the actual present value, which is about $1,770,000,006. Ít has nowhere been suggested that the adjusted-service compensation allowed is inadequate, and I know of no justification for approximately doubling in effect the distribution provided for in the adjusted service compensation act by the device of payment 15 years in advance of maturity, particularly when such a proposal involves an enormous additional burden on the taxpayers of the United States. Moreover, I am very definitely of the opinion that the United States Government can not successfully sell three and a half billion dollars of bonds for this purpose at this time.

The present value of the certificates which will mature from 1945 to 1948 is approximately $1,770,000,000. There is some argument in favor of giving to the veterans the option to cash their adjusted-service certificates at the present time on a present value basis, but in order to reach a conclusion as to its soundness and advisability the proposal should be considered from three standpoints: First, whether it would constitute a real benefit to the veteran; second, assuming that a large proportion of the veterans avail themselves of the privilege accorded them, whether the distribution of this vast sum in cash would aid in the alleviation of the present business depression; and third, whether the Treasury could borrow the necessary funds at the present time without serious interference with public-debt operations.

As to the first consideration, I seriously question whether the payment of adjusted-service certificates at their present value as stated above would constitute a real benefit to the veterans. As a group these men doubtless represent an approximate cross section of our male population. In view of this fact and of their present age and the period of years which has already afforded opportunity for adjustment to peace-time pursuits, they would not seem to be a class which, as such, is in particular need. Furthermore, the retirement at present of outstanding adjusted-service certificates would automatically defeat the purpose which, after careful and extended deliberation, these certificates were devised to serve. Compensation was made in this form and not in a lump cash payment in order that the veteran might be given an investment the value of which would increase from year to year and be available for distribution at a time when, presumably, it would be most helpful. I do not believe that the Government would be justified in inviting these men to relinquish their compensation certificates which are, by intention, equivalent to insurance policies. It is possible for the veterans now to borrow on their certificates when temporary emergency needs make that procedure necessary and the records show that many have taken advantage of this privilege.

As to the second consideration, the effect on economic conditions, the Government would have to finance the payments by the sale of securities in the open market, and it is clear that, in so far as the retirements would place cash in the hands of the beneficiaries and result in the current spending of that cash, the net effect of the operation would be to divert savings into purchases for consumption. Obviously not all veterans would take advantage of the privilege of cashing their certificates. Moreover, this number would include many who have borrowed on their certificates, in such cases the proposed payments would be, in part, absorbed in the liquidation of the loans. In any event, it is clear that retirement of outstanding certificates would result in the addition of a very large sum to the volume of funds currently available for commodity purchases, and would probably have the direct effect of stimulating buying and thus moving goods into consumption. This would unquestionably have a stimulating effect on business, but it would be temporary stimulation of an artificial character and could hardly be expected to have such lasting qualities as would bring about a permament recovery.

But we must also consider the other side of the picture. The additional funds are to be obtained by borrowing. An issue of bonds for this purpose would draw money out of the bond market and make funds less available for other issues. Business recovery is in some degree at least dependent on a good market for new securities to supply the needs of various business enterprises. To the extent that funds seeking investment are diverted to the purchase of Government bonds to be issued for this special purpose, to that extent is the capital market depleted of funds otherwise available for industrial and other employment. Moreover, even if the general economic effect would be beneficial—and I do not believe that it would-are we justified in attempting to achieve such a result at the expense of the veterans? Is it any more sound or equitable to invite them to cash in their endowment insurance policies and to spend the proceeds for current expenses than to invite other policyholders throughout the country to forego the benefits of future protection and to make a similar sacrifice in the hope of giving a temporary stimulus to business? Business must look to other means of recovery than the dissipation of savings.

Finally we come to the third consideration, as to whether the borrowing of the vast sum needed can be effected without interference with public debt operations and without greatly increased interest costs on the public debt. My opinion is that it can not. In March, 1931, the Treasury is faced with public debt maturities in excess of $1,100,000,000, calling for a large refunding operation. While the market for Government securities is at present good, we can not take it for granted that it has a capacity to take an indefinite amount of these securities. It will be a sufficient task to float an issue or issues already planned without an additional one, and putting in additional issues will undoubtedly result in a higher cost of credit to the Government. Moreover, the day is not distant when many billions of dollars of bonds bearing a 474 interest rate become callable. A large increase in the public debt at this time, whether in the form of short-term paper or even long-term bonds, must necessarily adversely affect the extremely important refunding operations that must then be undertaken.

It seems, therefore, that the proposal to pay off the adjusted service certificates at this time would be against the best interests of the veterans, unjustified as a matter of broad economic policy, and seriously detrimental to the public debt operations of the Government. Sincerely yours,

A. W. MELLON,

Secretary of the Treasury. Hon. ARTHUR H. VANDENBERG,

United States Senate. Senator COUZENS. Do you mind if I ask a question at this point? Undersecretary Mills. Not at all.

Senator COUZENS. Who is the best judge with respect to the first reason given? Is the Treasury Department, or are the veterans the best judges with respect to the payment of this bonus at this time? In other words, an attempt is made to answer for the veterans and the Treasury Department both.

Undersecretary Mills. I think the answer to that question, Senator, is that Senator Vandenberg, in good faith, asked the Treasury Department to express an opinion, and in expressing an opinion the Treasury Department pointed out that it was not good policy for the veteran, or anyone else, to cash in an insurance policy for the purpose of meeting current expenditures, just as a matter of broad general policy.

Senator COUZENS. I was asking the Undersecretary whether, in his opinion, the Treasury was better able to judge for the veterans than the veterans themselves.

Undersecretary Mills. I should answer that question in two ways. I should say that each individual veteran was probably in a better position to judge his own special circumstances; but if you want to look to the welfare of 3,500,000 men as a group, I think the disinterested opinion of the Treasury would probably be, on the whole, better.

Senator COUZENS. In other words, the Treasury is better able to decide what is best for the veterans than the veterans themselves? That is your opinion.

Undersecretary Mills. I think it is my opinion, if you will accept the qualification that each individual veteran might decide better, from the standpoint of his own particular circumstances. But if you want to consider the effect of this huge operation not only on the veteran, but on the country, I think the Treasury Department is better qualified to pass upon the economic effects, and the veteran will feel them just as much as anyone else.

Senator COUZENS. What would the Undersecretary say if a bill. were enacted which gave an option to the veteran, so that if it were beneficial for him to retain the insurance policy, he could do so, and let those who need it take advantage of it? Would the Undersecretary then believe that the Treasury Department was better able to decide that question than the individual veterans?

Undersecretary Mills. I think I would have to see the bill, Senator. It is not only a question of how it is going to affect the veteran, but how it is going to affect the country; and he is a part of the country.

Senator COUZENS. But the Undersecretary, in the letter he hasjust read, argues from three standpoints. I am not objecting to him arguing all he wants from the second and third standpoints, but I think there is some question as to the good taste of the Treasury Department arguing from the point of view of the veteran. It seems to me he is just as competent to decide those matters for himself, as. the Treasury Department is.

Undersecretary Mills. In so far as it affects him individually, yes. In so far as it affects 3,500,000 of them, and 120,000,000 of his fellow citizens, he is not as competent as the Treasury to pass upon the economic effects.

Senator COUZENS. I assume the Undersecretary will admit that these veterans' organizations and their representatives are able to determine those matters for the veterans as well as the Treasury Department is.

Undersecretary Mills. Senator, their opinion is by no means unanimous.

Senator SHORTRIDGE. Under all the bills, it is optional with the veteran to avail himself of their provisions, is it not?

Undersecretary Mill. Senator, I have not seen a single bill, with one possible exception, that does not offer the veteran a positive in-ducement to cash in.

Senator SHORTRIDGE. It may be an inducement, but still it is optional with him whether he avails himself of its provisions or not.

Undersecretary Mills. There is not much option if you offer to. pay a man a thousand dollars to-day which is due 15 years from now. He would have to be a lunatic not to accept that.

Senator HARRISON. Some of the bills do not offer that. They offer, not the face value, but the present value.

Secretary MELLON. There are many organizations and many classes, and that same question would apply in all those cases. Under that argument, all classes who have something affecting them should

be allowed to decide for themselves, rather than have the legislative and governmental authorities decide.

Senator BARKLEY. Mr. Secretary, in your letter you seek to put on the same basis these Government certificates and private life insurance policies calling for a cash surrender value. You do not seriously contend that they are parallel situations, do you? This certificate is one that has not been entered into voluntarily by the soldier. It is one that was forced on him by the Government. He had to take it or nothing. An insurance policy is a contract privately entered into, voluntarily, between the insured and the insurance company. I think the facts are that during this depression hundreds of thousands, and millions of these contracts have been surrendered in order that they might accept the benefits of the cash surrender value. It strikes me that it is not quite a fair statement to put them on the same basis, and to say that we might as well enact a law inviting insurance-policy holders to cash in their policies at the present cash value. One is a voluntary contract, and the other is an involuntary contract imposed by the Government.

Senator REED. One is bought, and the other is given.
Senator BARKLEY. I do not quite agree to that.
Senator COUZENS. I object to that designation of "given.”

Senator Barkley. I think it was a rather niggardly gift, if it was a gift. I think the men who obtained them paid a good deal more for them than the payment of a premium once a year on an insurance policy.

Undersecretary Mills. The fact remains, Senator, that it does offer him and his family the same degree of protection that an equivalent insurance policy, privately paid for, would offer. There is the element of protection there, and if he cashes it in,

he foregoes that element of protection. I think that is what the Treasury had in mind.

Senator COUZENS. Is it not a fact that he has the same opportunity to purchase an insurance policy as every other citizen? My assumption is that when Congress enacted this adjusted compensation law, it had in mind that it was doing justice to the veterans, because they were underpaid during the war, and therefore it can not be considered as a gift, but must be considered as an act of justice for the underpaying of them during the service they performed during the war. So I resent the idea that this was a gift to the veterans, or that they do not have the same opportunity to purchase an insurance policy as anybody else has.

Senator Walsh of Massachusetts. Let us have the other letters, and then we can have general discussion.

Undersecretary Mills. The next letter is a letter of December 12, 1930, to Senator Vandenberg. [Reading:)

TREASURY DEPARTMENT,

Washington, December 12, 1930. MY DEAR SENATOR VANDENBERG: I have your letter of December 6 in which you submit for further consideration the question of financing the retirement of outstanding adjusted-service certificates and propose a new method of conducting the operation.

As I understand ic, your present proposal is for the Government to issue to the veterans 3 per cent bonds in exchange for their adjusted-service certificates, the bonds presumably to mature from 1945 to 1948, as is the case with the certificates. While I fully appreciate and sympathize with your desire to explore all possibilities, I am compelled to say that it does not seem to me that the present plan

differs in principle from that suggested in your letter to the President of November 24, and in some respects is open to even more serious objections. From the standpoint of the Treasury, there is no real difference between distributing some $3,400,000,000 in bonds or in cash. The only difference would be that in the one case the bonds would be offered to the investing public through normal channels and in an orderly way, and in the other the initial distribution would be made to the veterans with the idea that they in turn would sell to the investors. On the whole, I believe the Treasury Department could market these securities to much better advantage than individual veterans in need of cash, and probably with much less disturbance to the investment and money markets. Since the idea is to have the veteran convert the security into cash, why not then give him cash in the first instance? An issue of over $3,400,000,000 of 3 per cent 15–20 year bonds would, in my judgment, and according to the present yield of outstanding lony-term United States bonds, almost certainly go to a discount. The veteran would not get the full value of the United States security handed him. Moreover, in the smaller communities he would have no means of ascertaining what the real market value of the bonci is, and would almost necessarily be the victim of scalpers who would buy these securities at a heavy discount and profiteer at the expense of the veteran.

From the standpoint of the Government credit, future fiscal operations, and the investment market, the effects of the distribution of over $3,400,000,000 directly to the veterans would not be substantially different than those resulting from a direct sale to the investing public, which I discussed in my letter of December 4.

Moreover, the new proposal is open to other objections outlined in my letter of the above-mentioned date. To retire these certificates at face value in 1931 rather than at maturity will result in the payment of about $1,640,000,000 more than the actual present value. As I wrote you, it has nowhere been suggested that the adjusted-certificate compensation allowed is inadequate, and I know of no justification for approximately doubling the distribution provided for in the adjusted service compensation act.

În your letter you suggest certain considerations worthy of study in relation to such a program. First, that it would not increase the current carrying charges upon these obligations. That, I am afraid, is a false assumption. The mistake arises from treating the appropriation of $112,000,000 a year as a carrying charge. What it actually is, is a sum made available every year for the purpose of investment, which, with compound interest at 4 per cent, will at the end of the period provide the means necessary to meet the obligations maturing at that time. To put it perhaps more plainly, if we issue $2,800,000,000 of Government bonds and pay the interest on them for the next 14 years, at the end of the 14 years we will not only have paid $1,176,000,000 in interest, but we will still have to find the funds with which to discharge an obligation of $2,800,000,000. On the other hand, if we invest the $112,000,000 for the next 14 years, we will have on hand on the maturity date securities of a value sufficient to discharge the obligation.

In the second place, you state that the annual contribution to the sinking fund now required by law would not have to be increased, and that the sole effect in dollars and cents would be the extension for a few years beyond 1949 of the date when the whole national debt will be canceled. It is quite true, of course, that the proposal does not necessarily involve increasing the amount annually appropriated for sinking-fund purposes, but it must be equally true that to the extent that we increase our public debt by a very large amount at the present time we necessarily impose a large additional burden in the way of current interest charges, and must, sooner or later, through taxation, whether in the form of a sinking fund or otherwise, raise the funds to discharge the new capital obligation. I am unable, therefore, to perceive the merit of this particular argument.

Third. You suggest that the seeming increase in the national debt is more apparent than real. Here, again, I can not concede the accuracy of this statement. You will readily appreciate, I think, that the payment of $3,400,000,000 in 1931 is something very different from the payment of a similar sum 14 years from now.

The direct effect of such a program is to increase the outstanding public debt by approximately 10 per cent.

I regret to be unable to give you a more favorable answer. but know that in writing me you want me to give you my very best judgment on this important question. Sincerely yours,

A. W. MELLON,

Secretary of the Treasury. Hon. A. H. VANDENBERG,

United States Senate.

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